Bhattacharya, Galpin (Yes, a SBU GRAD), Ray, and Yu provide an intriguing look at the financial media. As the title suggests, the paper is centered on coverage of IPOs in and out of the Internet Bubble period, but in getting to that topic, the paper brings up many roles the media play.
For instance: not only does the media lower information costs (Merton 1987 as well as others point this out), they also provide a 'positive feedback loop' and shape public thought (Schiller 2000), and even buy favor of corporations (Dyck and Zingales 2003)
[I would also add the possibility of getting increased ad revenue--Reuter and Zitzewitz 2004)].
The authors find that during the internet bubble, there was more coverage of internet IPOs and this coverage was more favorable, then for non internet IPOs. However, it appears that investors discount this coverage and do not let it significantly impact pricing.
As an aside, can you imagine reading 171,488 news items? WOW! Even with co-authors, that is a ton of reading!!!
""Was the media coverage different for internet IPOs? We read all news items that came out between 1996 through 2000 on 458 internet IPOs and a matching sample of 458 non-internet IPOs--– a total of 171,488 news items--– and classify each news item as good news, neutral news or bad news. We find, not surprisingly, that the media coverage was more intense for internet IPOs. All types of news--– good, bad, or neutral-- were more for internet IPOs than for non-internet IPOs in both the bubble period and in the post-bubble period. Second, we document that the net news (good news minus bad news) was more positive for internet IPOs in the bubble period, and more negative for internet IPOs in the post-bubble period. Third, we document that net news increased after a positive stock return, and decreased after a negative stock return for internet firms. This provides some evidence in favor of Shiller's (2000) positive feedback hypothesis."
A bit later:
"We find, not surprisingly, that good news increases risk-adjusted returns the next period, and bad news decreases risk-adjusted returns the next period, and so net news (good news minus bad news) increases risk-adjusted returns the next period. We find, surprisingly, that the effect of net news on next period's risk-adjusted return was lower for internet IPOs, especially during the bubble period....We, therefore, make the following conclusion: though the media hyped up the good news about internet IPOs in the bubble period and hyped up the bad news about internet IPOs in the post-bubble period, the market somewhat discounted the media hype, especially during the bubble period
Interesting paper! Definitely recommended!
Bhattacharya, Utpal, Galpin, Neal E., Ray, Rina and Yu, Xiaoyun, "The Role of the Media in the Internet IPO Bubble" (October 2004). http://ssrn.com/abstract=606264